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THE DEFINITION OF UNDERPERFORM AND OUTPERFORM

Outperform

Analyst ratings can range anywhere from buy, strong buy and near-term to outperform, underperform, neutral and hold. They carry clout amongst professional and novice investors and serve as a reference point for trading decisions whether through etrading or more traditional investment routes. While it’s important to read the definitions of each analyst’s ratings, most terms have universal meanings that include underperform and outperform.

An outperform rating means that there is strong speculation a stock is expected to do better than market return. Equivalent terms include “moderate buy” or “accumulate”. An underperform valuation means that a stock is predicted to do worse than market return. The phrase is interchangeable with moderate sell or weak hold. Underperform and outperform ratings tie in with market fluctuations as a result of macroeconomic and microeconomic factors that are often times uncontrollable. Microeconomic variables occur at company-level and consist of revenue, earnings, margin and production capacity. Macroeconomic variables on the other hand, are national and global events that are largely unforeseen such as economic breakdowns or political volatility. These variables directly influence investment markets and stock indices.

When stock indices are moving upwards, it indicates that most stocks will do the same and vice versa. The phrases outperform and underperform illustrate the return from a specific stock, bond or mutual fund compared with the average of the group or index. For instance, stock mutual funds are usually researched in relation to whether a specific fund outperformed or underperformed the NASDAQ index. Market analysts that cover stocks utilize these terms to explain how they foresee a particular stock performing in relation to other stocks in the same industry. It ties in directly with how strong or weak the investment potential may be and whether it’s an opportune time to enter the markets. When a stock is given an outperform rating, it can be seen as a buy recommendation. If a stock is assigned an underperform rating, it can be viewed as an indication to sell. Because market analysts rarely give sell ratings, when a stock is downgraded to underperform it is often a sign to sell.

Performance results of mutual funds are usually compared against benchmark indicators such as a stock or bond index. This is a tool for investors to figure out whether their funds have outperformed or underperformed relative to the overall stock market. If there is no way to determine whether a mutual fund has a strong probability of outperforming a certain index, then it’s better to buy an index fund that is geared towards matching the performance of the index.

Although comparing your profits with a benchmark may be beneficial, your results will often vary in relation to the benchmark. If your investments are conservative, then you will underperform when the market is bullish. However, if your investment approach is more aggressive, then you will outperform in bearish markets.